“Responsible governments rely on sound data to make their decisions.”
“We will release to the public key information that informs the decisions we make.”
“We will make decisions using the best data available.”
That was the pledge from the Liberal government when it campaigned for your vote. Their buzz phrase was “evidence-based decision making,” but that may have been a hollow pledge, at least on the housing file.
Tom Kmiec, Conservative MP for Calgary Shepard and Deputy Shadow Minister for Finance, is trying to add more data to the debate over OSFI’s Guideline B-20. This rule change, he says, has slashed home sales, weighed on prices in more vulnerable regions, raised urban rents, increased renewal costs for the most vulnerable and set back thousands of Canadians from becoming homeowners. And all of this needs to be quantified.
But more than that, once the market eventually adjusts to B-20, we may be in the same spot we were before B-20, with record-high prices due (largely) to insufficient supply. Then what are policy-makers going to do, hike the stress test another 200 basis points?
Just this week, Statistics Canada stated that “Investment in housing fell 1.9% in the first quarter, the largest decline since the first quarter of 2009.” Unsurprisingly, StatsCan noted the decline in activity coincided with the “new mortgage stress measures introduced nationwide in January.”
A month ago, Kmiec tabled a motion to study the B-20 rule changes. “I moved the motion at committee on Wednesday,” he says. “The Liberals said nothing when given the opportunity to respond to the motion or propose amendments. They simply voted it down straightaway without any commentary whatsoever.”
And it wasn’t the first time his colleagues tried to shed light on the dark implications of OSFI’s policy.
“In a dissenting report [to the Liberal-controlled Finance Committee’s 2017 rule change review], the Conservatives on the Finance Committee recommended [the government] tailor mortgage policy with different regions in mind, not hit everyone across the country with one-size-fits-all solutions, because those don’t work,” Kmiec told CMT.
The Problems at Hand
“The 2% stress test is punishing people,” he argues. “Numerous constituents tell me they’re failing the stress test. Others are trying to renew with their own bank and receiving much higher rates than they could have received elsewhere.” Many of those people could have got a mortgage under the rules that had been in place for years previous.
“What was supposed to dampen risk in Vancouver and Toronto dampens all markets, even markets that didn’t need dampening,” he said. That includes Calgary, Edmonton, Saskatoon, Halifax, many smaller Ontario cities and so on. “OSFI [has said] they implemented the rule changes not to reduce demand, but to protect the banks.”
But falling prices may not protect the banks. Moreover, one hundred thousand potential jobs lost and indebted borrowers turning to high-cost lenders could also end up hurting the banks, even if indirectly.
The Affordability Myth
Many have applauded B-20 for reducing prices, and Kmiec concedes that is happening in many markets, but he notes, “if you can’t qualify for a mortgage, you can’t buy a lower priced house anyway, so how is that helping anybody?”
“People buying at the lower end are being priced out of the market entirely in large urban markets…There are way more people competing for entry level homes…..[OSFI] effectively compressed buyers into one segment of the market,” he added. That doesn’t even speak to soaring rents, spurred by now-shut-out homebuyers.
“[The government] is depressing demand when the problem was supply,” Kmiec says.
And it’s not just about home prices, he adds. It’s also about debt servicing for stress-test flunkies. “If I can’t pass the stress test, I may go to unregulated lenders where the rates are higher and the conditions are detrimental to me.” That, in turn, creates greater risk of insolvency.
We Need More Facts
For the reasons above, B-20 is “worthy of a study by the committee,” Kmiec maintains.
He says he’s never been this concerned about mortgage policy in the past. “With prior rule changes, I used to think, ‘Ho hum they changed the rules again.’ But then I looked at this change, and realized how incredible it is that so many other rules have changed since 2008.”
“I’m not against a stress test in principle,” he says, “but 200 basis points is way too high.” Kmiec believes a market-based spread (independent of the major banks’ posted rates) would be more reasonable, such as one based on forward rates or market forecasts.
“You could also tailor the stress test to [the risk in] certain market segments, or tailor it to term length.” Mortgages with 10-year fixed terms, for example, could be stress tested at their contract rates, given the ability of low-ratio borrowers to refinance higher payments at maturity and earn greater income over the course of a decade.
“If the government’s goal is to protect the banks, then incentivizing longer-term mortgages makes sense,” Kmiec argues.